Neutral on Peabody Energy - Analyst Blog

We recently reiterated our Neutral recommendation on Peabody Energy Corporation (BTU).

Based in St. Louis, Missouri, Peabody Energy is involved in the exploration, mining and production of coal for its global consumers. The world's largest private sector coal mining company, Peabody owns majority interests in more than 30 mines in the U.S. and Australia. The company's coal fuels 10% of all U.S. and 2% of worldwide electricity generation. The company conducts mining operations mainly in Western and Midwestern U.S. and in Australia.

Recent Quarter Synopsis

Peabody Energy's third-quarter results were encouraging with earnings outperforming and revenues coming in line with the consensus. The company reported earnings of 99 cents per share, beating the Zacks Consensus Estimate of 91 cents. Profits in the quarter also nearly doubled compared to last year's earnings of 49 cents, driven by strong global demand for coal, particularly from China and India.

Peabody's quarterly revenue, at $1.86 billion, increased 11% year-over-year on the back of a 36% rise in Australian revenues per ton. The company's revenue for the quarter was in line with the Zacks Consensus Estimate of $1.857 billion.

For full year-2010, Peabody has guided adjusted earnings in the range of $2.95 – $3.15 per share, while total coal sales for the year are expected to be roughly 240 – 260 million tons. The Zacks Consensus earnings estimates for EPS for the fourth quarter, fiscal 2010 and fiscal 2011 are 91 cents, $3.12 and $4.58, respectively.

Outlook

Peabody's growth story continues to ride on the strong China-India-Australia connection. These markets are expected to be the demand drivers in both the near and long term. Going forward, the International Energy Agency (IEA) estimates demand for coal to rise 53% through 2030, with China and India expected to constitute over 50% of that growth.

Peabody has an edge over competition due to its strong Australian leverage, which provides access to the Asia-Pacific markets – particularly China and India. Primary competitors of Peabody include Arch Coal Inc. (ACI) and CONSOL Energy Inc. (CNX).

The company's future growth is mainly linked to increased demand for energy in the Asian economies and the recovery of the steel markets in developed economies such as Japan, South Korea and Taiwan. Additionally, the company is positioned to benefit from its large production and reserve position in the Powder River and Illinois Basins, which are safe and low-cost enabling it to continue to penetrate Eastern U.S. markets.

We believe Peabody Energy is poised to grow given the strength in its Australian operations along with growing energy demand across the globe. Looking ahead, Peabody continues to advance its development of metallurgical and thermal coal projects with the goal of raising its Australian production platform to between 35 and 40 million tons per year by 2014. This along with the Asian leverage should drive the company's bottom-line, in our view.

However, we expect the demand for coal to be affected by the continued drop in natural gas prices, which serves as a substitute for coal in electricity generation. Additionally, any rise in coal transportation costs or the lack of sufficient rail and port capacity could reduce the company's top-line. Thus, we prefer to remain on the sidelines on Peabody Energy.

 
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